Despite slowing sales, Samsung’s mobile division posts a positive start to the year

Samsung’s financial results for the first quarter of 2014 have just been published, overall the company is looking as sturdy as always.

The technology giant announced revenues of 53.68 trillion Korean won (52 billion USD) from January to March this year, resulting in a total operating profit of 8.49 trillion won ($8.24 billion) for the first quarter of the year. Looking more specifically at the IT & Mobile Communications (IM) division, which consists of the Mobile Communications and Networks operation responsible for smartphones, the department posted an operating profit of 6.43 trillion won ($6.24 billion) from 32.44 trillion won ($31.49 billion) in revenue. The mobile business alone accounted for 31.36 trillion won ($30.44 billion) of this income.

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One other noticeable achievement for the company over the quarter came from Samsung’s memory chip business, which accounted for the bulk of the semiconductor department’s 9.39 trillion won in revenue, with memory revenues totalling 6.29 trillion. This helped Samsung’s semiconductor unit’s operating profit margin leap to 20.8%, up from 12.5% a year ago.

So how is the company faring compared with the previous couple of years? On the whole, Samsung is looking very steady, performing on par with previous results at this time of year.

Quarter on quarter, Samsung’s total sales revenue dropped from 59.23 trillion won to 53.68 trillion, a decline of 9.5 percent, but this was to be expected during the new year lull. Operating profit was quite flat at 8.49 trillion last quarter, compared with 8.31 trillion won in Q4 2013. Compared with Q1 2013, sales revenue was up by 1.5 percent whilst operating profit was down by 3.3 percent.

Turning again to Samsung’s IM division, quarter on quarter profit results defied the general company trend. Although sales revenue experienced a similar first quarter dip to the rest of the company, down 4.3 percent, operating profit leapt up by 17.55 percent to 6.43 trillion won, from 5.47 trillion at the end of last year. Compared with the same period last year, revenue and sales for the IM division were virtually flat.

Although market demand for both smartphones and tablets decreased slightly during the first quarter, the boost to operating profits for the IM division aren’t so surprising. Samsung has been making a conscious effort to be more efficient when it comes to marketing expenditures.

Importantly, this data doesn’t take into account the launch of Samsung new flagship Galaxy S5, the device’s April 11th release date fell just after the last reported quarter. Early indications suggest that the handset has made a strong start, and company executives are hoping for a “slight” increase in quarterly sales for smartphones and tablets come June.

After another quarter of decent profit, Samsung’s cash pile has now swollen to 61.5 trillion Korean won ($60 billion).

Smartphones sales decline slightly

The other half of the story comes from market research firm Strategy Analytics, which has conducted its own investigation into the number of units that Samsung has shipped (Samsung does not publish its own sales numbers). The company’s results show that Samsung shipped around 89 million units in the first quarter. It also found that Samsung’s first quarter smartphone market share, in terms of actual units sold, slipped slightly to 31.2 percent from 32.4 percent. Even so, Samsung still controls the dominant position in the smartphone market, followed by Apple on 15.3 percent, followed by Huawei and Lenovo on 4.7 percent each.

Samsung stated that its profit margin on smartphones was unchanged from a year earlier at 19.8%, confirming the suspicion that sales are declining slightly. This assumption is reflected in the declining revenue for the IM division over the past two quarters. Analysts suggest that margins could face more pressure in the near future as competition from cheaper Chinese manufacturers intensifies.

Cheaper high-spec smartphones, like the new OnePlus One, could pose a serious threat to Samsung’s more expensive flagship models over the next year.

As we’ve covered before, Samsung’s bottom line is also benefiting from the scaling back of the company’s advertising budget. Instead, the company is planning more promotions that directly link to sales, as opposed to bigger, broader message marketing.

Despite the increasing competition on price at the high-end, Samsung executives stated that the company has no immediate plans to focus its efforts on the low-end smartphone market, although they do see potential in emerging markets for sub $100 handsets. Instead, Samsung plans to eventually brings its flagship technological advances into mid and low tier devices over time.

What’s next for Samsung?

Samsung appears to be off to a good start to the year. So far, managing to offset the stall in mobile sales, by making savings in other costs, has helped the company’s mobile division to post an exceptionally strong start to the year. However, it’s unlikely that such a plan would be sustainable in the long term.

As Samsung seems opposed to going after cheaper markets for now, perhaps we will see additional Samsung flagship models released this year to help sustain moment and market presence, and to compensate for smaller advertising budgets and increased competition. Samsung is also likely betting on its early investments into the wearable market to help offset the stagnating premium smartphone market.

It will be interesting to see what shape Samsung is in once it publishes sales revenues for the next quarter, which will take into account the launch of the Galaxy S5.